Charter Communications, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Charter is a U.S. cable and broadband operator with residential, commercial, advertising and mobile businesses; it reported one segment, cable services. Financial amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $11.347B | $10.854B | $22.553B | $21.511B |
| Adjusted EBITDA | $4.185B | $4.051B | $8.240B | $7.944B |
| Income from operations | $1.541B | $1.360B | $2.966B | $2.402B |
| Net income attributable to Charter shareholders | $314M | $273M | $567M | $441M |
| Diluted EPS | $1.39 | $1.15 | $2.50 | $1.84 |
| Operating cash flow | $2.761B | $3.096B | $5.447B | $5.795B |
| Free cash flow (non-GAAP) | $1.112B | $804M | $1.757B | $755M |
- Q2 revenue grew 4.5%; first-half revenue grew 4.8%. Internet and commercial customer growth and mobile launch revenue contributed, partly offset by fewer video customers.
- Operating margin was approximately 13.6% in Q2 versus 12.5% a year earlier. Adjusted EBITDA margin was approximately 36.9% versus 37.3%.
- Revenue mix in Q2: Internet $4.103B, video $4.391B, voice $489M, commercial $1.615B, advertising $395M, mobile $158M and other $196M. Internet revenue rose 8.8%; video increased 0.6%; voice declined 7.8%; advertising declined 7.5%.
- Q2 mobile revenue included $111M of device revenue and $47M of service revenue; Charter reported 518,000 mobile lines at quarter-end.
Balance sheet, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $696M; restricted cash was $150M. Current assets were $3.340B and current liabilities $9.875B.
- Debt principal totaled $72.6B, including $11.2B of credit facility debt. Balance-sheet debt was reported at $73.306B total accreted value, including $1.522B current portion and $71.784B long-term debt.
- Charter had approximately $4.1B available under credit facilities and reported leverage of 4.4x. Management’s target leverage range was 4.0–4.5x at Charter and up to 3.5x at Charter Operating.
- First-half capital expenditures were $3.262B, down from $4.574B. Cash interest paid was $2.017B, versus $1.889B a year earlier.
Material changes and management commentary
- Residential Internet customers increased by 1.174M year over year to 24.244M; residential video customers declined by 404,000 to 15.802M, and voice customers declined by 517,000 to 9.808M. Total customer relationships reached 28.657M, up from 27.621M.
- Operating costs rose $371M in Q2, primarily due to $244M higher mobile costs and $24M higher programming costs. Mobile reduced Adjusted EBITDA by approximately $119M in Q2 and $239M in the first half; it reduced free cash flow by approximately $297M and $588M, respectively.
- Free cash flow improved year over year, principally because of lower capital expenditures and higher Adjusted EBITDA, partly offset by working-capital movements and increased cash interest. Operating cash flow declined in the first half, including a working-capital outflow associated with standardizing billing cycles and lower payables.
- Share repurchases were approximately $837M in Q2 and $1.707B in the first half. Remaining board authorization at June 30 was $769M. Charter also repurchased Charter Holdings units from Advance/Newhouse.
Outlook, risks and unusual items
- Management expected 2019 capital expenditures, excluding mobile, of approximately $7B, compared with $8.9B in 2018, and expected lower capital expenditures to continue for the remainder of 2019. The filing does not provide clear formal revenue or earnings guidance.
- Management expected programming costs to continue rising and said it had not fully passed those increases to customers and did not expect to do so without potential customer losses. Competition, customer experience, network investment, mobile scale-up and device-related working-capital needs were highlighted as risks.
- New mobile service is expected to continue weighing on Adjusted EBITDA and free cash flow during its growth phase. Management said it expects mobile to support core-product sales, customer retention and longer-term profitability, but those benefits are not assured.
- Interest expense increased $67M in Q2 and $141M in the first half, mainly reflecting higher average debt. Derivative fair-value and foreign-currency movements contributed a Q2 loss on financial instruments of $119M.
- A $41M impairment of non-strategic assets contributed to Q2 other operating expenses. First-half equity-investment impairments were $121M, compared with $58M a year earlier.
- In July 2019, New York regulators approved a settlement resolving disputes over merger-related network buildout requirements; no penalties or forfeiture were assessed, and Charter said required incremental spending would not materially affect its financial condition, results or liquidity.
- Charter described ongoing patent litigation, including Sprint matters, and other legal and regulatory proceedings. It said certain outcomes cannot be predicted and adverse intellectual-property outcomes could involve damages, injunctions or licensing costs. The filing reports no material change to its risk factors from the 2018 Form 10-K.
Key investor verification points
- Confirm the sustainability of Internet and commercial growth against continued video and voice subscriber losses.
- Track mobile line growth, device-versus-service revenue, and the resulting EBITDA, free-cash-flow and working-capital burden.
- Reconcile free-cash-flow improvement with lower capital spending and assess progress against the approximately $7B 2019 capex outlook, excluding mobile.
- Monitor debt, interest costs, leverage, refinancing needs and continued shareholder repurchases relative to cash generation and the stated leverage targets.
- Assess programming-cost inflation and the company’s ability to manage pricing without worsening churn.
- Review subsequent developments in the cited litigation and regulatory matters, as well as the use of remaining repurchase authorization.